There are 5 good reasons to buy a home.
I'm writing this post in response to some of the questions I received regarding my recent article, Why Your Home is Not a Good Investment. It seems, I gave some folks the impression that I'm not in favor of people owning their own home. However, the fact is, I believe just the opposite.
So, to set the record straight once and for all (I hope), I want you to know that I am totally in favor of everyone buying their own personal home. In fact, there are at least 5 good reasons for people to buy their own personal home. However, buying for investment potential is NOT one of those reasons.
Anyway, here are the 5 reasons why I believe a person should own their own personal residence.
1: Emotional Security.
There is nothing that creates a greater level of a person's emotional security than having the knowledge that, no matter what else happens in the world, you can always retreat to comfort and security of your own home.
Whether consciously recognized, it's a well established belief among psychologists that people who live in a home that they own are far more likely to be emotionally secure than those who live in a rented home.
It seems that people who live in a rented property don't have the same level of emotional attachment, nor do they have the sense of personal pride which, in and of itself, creates a high level of self worth and self esteem.
It's also widely believed, that children who grow up in a home that's owned by their parent(s), also demonstrate a greater level of achievement which is believed to emanate from the security and sense of pride stemming from homeownership.
If you want to draw an observation, watch how people treat something they've worked for and own vs. how people treat things they didn't work for and don't own. It's quite an eye-opener.
2. Neighborhood Stability.
In addition to the personal security brought about by owning one's personal home, is the fact that neighborhoods in which the homes are owned by their occupants bring stability to those who live in that neighborhood.
When the homes in a given neighborhood are owner-occupied, people get to know each other. There's a certain level of security that's created by being familiar with those who live around you.
And, unlike rental housing, which tends to have a relatively high level of transience, people who own their personal home tend not to move very frequently; another stabilizing factor which provides a relatively high level of personal comfort.
3. Building Equity (Forced Savings).
Let's face it, for what ever the reasons, most people just aren't very good savers. So, if for no other reason, owning your personal home and making monthly mortgage payments is like putting money in a savings account.
Let's suppose you bought your own personal residence for $250,000 with a $200,000 mortgage. And (as unlikely as it is), that it was still worth only $250,000 after paying off he mortgage, you would have saved $200,000 that you probably never would have saved otherwise.
OR, if you happen to be a good saver, you'll have an additional $200,000 on top of what ever else you've been able to sock away.
4. Income Tax Savings.
When you own your personal residence, IRS rules allow you to deduct the interest on your mortgage loan, as well as your real property tax from your gross income. Regardless of where you live, this is a very significant savings.
For example, let's say that you just bought a $250,000 home and put down 20% and you got a $200,000 mortgage at 4.5% for 30 years. Your monthly payment for principal and interest would be $1,013.37. And, in the first year of your loan, your interest, alone, would total $8,933.99.
If you were in the 28% tax bracket, that means you'd have an actual income tax savings of $2,501.52 ($8,933.99 x 0.28). You can also consider this savings as a reduction of more than $200.00 in your monthly mortgage payment.
On top of the $2,501.51 income tax savings from the deduction of your mortgage interest, you also have the deduction of your property taxes. Assuming they're only 1% of your property's value ($250,000 x 0.01), you'd be able to deduct another $2,500.00 from your income tax. And, again using the 28% tax bracket as an example, you'd have an actual tax savings of another $700.00 on top of the $2,501.99 from the mortgage interest deduction.
In the end, all of these deductions are major financial benefits one can only achieve by owning their personal residence.
5. Value Appreciation.
Yes, I know. Real estate values do fluctuate from time to time. However, it's also true, that over relatively long holding periods (10+ years), homes tend to appreciate at about an average annual straight-line rate of about 5%.
While past performance is no guarantee of future performance, most people consider it far more likely than not, that the typical personal residence will increase over time.
And, suppose it only increases by 3% on a straight-line annual average over the next 30 years, that means that the house you just bought for $250,000 will be worth about $600,000. And, it'll be debt-free, as well.
In the end, while there are 5 good reasons to buy a home for your personal residence, keep this in mind - there is not a single reason to buy a personal residence and consider it an "investment property."
While your personal home is definitely an investment in your personal lifestyle and the future of your emotional security, as well as the immeasurable benefits to your family and your community, your personal residence is not and should not be considered a financial investment.
I hope this article cleared up any misunderstanding that may have resulted from my initial post, Why Your Home is Not an Investment.
I'd love to hear your thoughts and comments. C'mon, and join the conversation!